chapter 2 basic economic problem

Click to edit Master title style,Click to edit Master text styles,Second level,Third level,Fourth level,Fifth level,*,Chapter 2 Basic Economic Problem,Scarcity,Choice and opportunity cost,Economic systems,Basic logic of this section (1),Economic basic problem: the resources are,scarce,and human beings wants are,unlimited,.,Thus, individuals and society have to,make choices,among many options.,Making choices means that they have to pay,opportunity cost,.,These choices include,what (which), how and for whom,.,People make different choices depending on different values, ideas, priorities and situations, thus developing different,economic systems,.,Although resources limit production ultimately, the,combination,of goods and services produced by an economy is,not,limited,within given boundaries,.,Production possibility,is introduced.,Basic logic of this section (2),How to tell how much those choices bring about satisfaction to people? Three approaches can be used to gauge the satisfaction:,marginal utility theory, consumer preference and indifference analysis,.,All major societies use,market system,. Market brings together buyers (demanders) and sellers (suppliers).,In competitive markets,prices adjust to the equilibrium level,at which quantity demanded equals quantity supplied.,The,law of demand,shows that there is an inverse relationship between price and quantity demanded, and the,law of supply,shows that a positive relationship exists between price and quantity supplied. But they do not show,how much they change,.,Price elasticity,of demand and supply answers this question.,1. Scarcity: Unlimited Wants and Limited Resources,Basic Economic Problem,Basic economic problem,arises from scarcity (,稀缺,),and is the result of different choices made by individuals and societies.,Or,two fundamental facts,together constitute the basic economic problem and provide a foundation for economics:,societys wants are virtually unlimited and the resources for producing the goods and services to satisfy societys wants are limited or scarce,.,All economic issues depends directly on these two facts.,Scarcity,Economists see resources as scarce in the sense that,no economy has sufficient resources to be able to produce all the goods and services everyone wants,.,Compared,with unlimited wants, resources are scarce.,Wants (,想要,),The,desires of consumers,(including business and government) to obtain and use various goods and services that provide utility (,效用,) that is, pleasure or satisfaction.,Wants in General,Our desires for,a particular good or service can be satisfied,.,But,goods in general can not be satisfied,.,Wants and Needs (,必要,),Resources,Economic resources:,All natural, human, and manufactured resources that go into the production of goods and services,.,Property and Human Resources,Economists classify all these resources as,property (,财产,) resourcesland and raw materials, and capital;,human (,人力,) resourceslabour and entrepreneurial ability.,Land,Natural resources used to produce goods and services,. It includes,all natural resources,(all “gifts of nature”) that are used in the production process, such as arable land, forests, mineral and oil deposits, and water resources.,Arable Land (,可耕地,),Land (Natural Resources),Capital (,资本,),Human-made resources used to produce goods and services,. Purchasing capital goods is known as investment.,Capital goods differ from consumer goods in that consumer goods satisfy wants directly, while capital goods do so indirectly by aiding the production of consumer goods.,The term “capital” as used by economists,does not refer to money but real capitaltools, machinery, and other productive equipment,.,Capital (Machine),Capital good does not refer to money,Labour,The physical and mental,talents and efforts,of people that are used to produce goods and services.,Labour (Human Resources),Labour on Strike,Entrepreneurial Ability (,企业家,),The human resources that,combine,the other resources to produce a product, make non-routine decisions, innovate, and bear risks.,Entrepreneurs Perform Several Functions,Taking the,initiative,in combining the resources of land, capital, and labour to produce a good or a service.,Making basic business-policy,decisions,.,Commercializing,new products, new production techniques, new forms of business organization.,They have no guarantee of profit in a market system, thus they are,risk bearers,.,Entrepreneurial Ability,Taking risks,Factors of Production,Because these four resourcesland, labour, capital, and entrepreneurial abilityare combined to produce goods and services, they are called the,factors of production (,生产要素,),.,Imagine If No Scarcity,Close your eyes for a minute and pretend you are in,paradise, a place where you have anything you want whenever you desire it.,On a particular day you decide you want a new pair of jeans, a new portable computer, a cell phone, and a new Ferrari sports car. Your friends may have a completely different list of wants, but all of their desires will also be satisfied.,The following day you can start all over and make any request you have, and they will all be fulfilled.,And so it will continue forever. Your body will never get old or sick, you will have all the friends and love you want, etc, etc.,There is no scarcity problem in the heaven,“,Oh, its great here, all right, but I sort of feel uncomfortable in a place with no budget at all,Boring?,Scarcity Leading to Economic Problems,But,in this world our wants greatly outstrip (,超过,) our ability to satisfy them,.,Anytime there is a situation in which wants are greater than the resources to meet those desires, we have an economic problem.,Examples of Scarcity,Time is a scarce resource for everyone, not just the terminally ill. In deciding which movies to see, it is time, not the price of admission, that constrains most of us. With only a few free nights available each month, seeing one movie means not being able to see another, or not being able to have dinner with friends.,In a,buffet restaurant, it is an all-you-can-eat affair, and you must decide how to fill your plate. Everything is free. The important scarce resource here is the,capacity of your stomach,. You must decide which to eat and in what quantity, because eating a chicken leg means having less room for more scrambled eggs.,Examples of Scarcity,Scarcity of Land,6,340 square kilometers, 23 millions residents (Shanghai),16,410,square kilometers, 7,837 people per square kilometer in central six districts (Beijing),Scarcity of Trees,Scarcity of Water,Scarcity of Water,Scarcity of Skilled Labour,(,生态,),Questions about resources,Money is a resource and is classified as “capital.” (T/F),A natural gas pipeline is an example of a capital goods. (T/F),Which of the following is not a factor of production?,a. A computer,b. A gold mine,c. An economics teacher,d. A $100 bill,2. Choice and Opportunity Cost,Choice,Since the economy cannot produce all that everyone wants, the resources available for production are scarce, and some kind of mechanism must be put into place to choose what will be produced and, by implication, what will not be produced.,This is why economics is sometimes called the,science of choice,.,Too Many Choices,“,As soon as questions of choice of action arise, human science is at a,l,oss.,”,(,Noam,Chomsky,),It is not easy to make decisions,Opportunity Cost,Because of these choices, the decision to produce one thing means that some other things will not be produced.,This point is so fundamental that economists have coined a special term to identify it:,opportunity cost, which is the amount of other products that must be forgone or sacrificed to produce a unit of a product.,Thus, it is always,measured in the units of the forgone good,.,Another definition: the value of the,next-best alternative,that is given up as a result of making a particular choice.,Why not Money Value,Why is it better to think of costs in term of opportunity cost rather than simply as money payments? Economists argue that using the concept of opportunity costs captures the,true measure,of any decision.,If we use money payments as the measure, then we,seemingly,have unlimited means to produce goods, since governments can always print more money. But no matter what any government might wish, any society has,only a limited amount of resources,.,When we realize this, we begin to realize that there is no such thing as a “free lunch”any decision necessarily involves the use of scarce resource which could have alternatively been used to produce something else.,Printing Money,量化宽松,(QE) 2, like t,he,“,nuclear football,”?,Never Forget Opportunity Costs,The total opportunity costs of some actions can never be known with certainty, and are sometimes called “,hidden costs” or “hidden losses”,as what has been prevented from being produced cannot be seen or known.,Thus, opportunity costs are often ignored.,Many people make bad decisions because they tend to ignore the value of such forgone opportunities.,To avoid overlooking opportunity costs, economists often translate questions like “Should I do this” into ones like “,Should I do this or do that,?”,If I do this, opportunity costs are “do not do that”.,Opportunity Cost,of Study,Choice and Opportunity Cost,Opportunity Cost of Governments Decision,Opportunity cost,One-armed Economist,President Harry Truman once said that he wanted to find a,one-armed economist,.,When he asked his economists for advice, they always answered, “,On the one hand, . . . .,On the other hand, . . . .”,Truman was right in realizing that economists advice is not always straightforward.,This tendency is rooted in the principles:,tradeoffs (,权衡取舍,折中,),are involved in most policy decisions.,Questions about scarcity and opportunity cost,True or false?,The rising living standards in developed countries is proof that the scarcity problem has been overcome.,Since the government can print money there is no opportunity cost connected with government spending.,The main opportunity cost of going to college is the foregone earnings.,Question about scarcity,Scarcity necessitates,a. utility.,b. efficiency.,c. inefficiency.,d. choice.,e. government regulation.,Question about opportunity cost,College students often skip class because,a. they view the explicit cost of class as too high.,b. they view the opportunity cost of attending class as high.,c. they view the dollar cost of class as too high.,d. they view the opportunity cost of attending class as low.,Question about opportunity cost,People often speed because,a. the marginal cost of getting caught is low.,b. the overall cost of getting caught is low.,c. the opportunity cost of getting caught is low.,d. the opportunity cost of not speeding is considered high.,Relationship among scarcity, choice and opportunity cost,choice,opportunity cost,choice,opportunity cost,forces,which involves,scarcity,choice,opportunity cost,For Whom Question,“,For whom” question is, to great extent, the question of the,ownership,of resources and whether it is better that certain resources be owned by society as whole or by private individuals.,In short, the “for whom” question (as well as the what and how questions) cannot be adequately addressed unless we look at the societys attitude toward the private ownership of resources and the question of who has the,power to make crucial decisions,.,3. Economic Systems,Different Economic Systems,Faced with three questions: what (or which), how, and for whom (or who), society will develop its own economic system that is basis of different solutions.,Different solutions require people to develop different economic systems, then different systems can,institutionalize,(,制度化,) different solutions.,(Old age pensioners),Characteristics of Market Economies,Entrepreneurship and risk,taking are rewarded with big financial gains.,Private property rights,are strictly enforced even when they result in many poor people and few very wealthy people.,Producers decide,what to produce based on consumer tastes and demands.,Productivity,results in more personal wealth,.,Governments role in the economy is limited,.,The economy is based on almost entirely on,supply and demand,.,Private individuals and companies,own,businesses and industry.,Overall, the,allocation of resources is efficient,.,Modern,Market Economy,= Capitalism,“Its Your money, not the governments”- President Ronald Reagan,Market system is not perfect,Market economy is not perfect,Merit-goods not enough in market economy,Characteristics,of Mixed Economy,The government controls,large industries, while private individuals control small businesses.,Citizens are,taxed heavily,to provide all citizens a social safety net such as welfare, free university tuition and free health care.,Property is controlled by both the government and private individuals.,Workers tend to be somewhat,less productive,than those in market economies,.,Consumers generally have a wide,variety choices,.,President Franklin Roosevelt introduced the principles of a mixed economy to the US by expanding the government, providing welfare and establishing Social Security for the elderly.,Command Economy,Commander and famine (,饥荒,),Command Economy,A command economy is a shortage economy,(,短缺,),.,Characteristics,of Command Econom,y,The government controls,all aspects of the economy,.,Private property is illegal,.,Supply and demand are determined by the government, not by consumers and producers.,Everyone is paid,to great extent,equally,no matter,how they do their,job,s,.,Industry and businesses are owned and controlled by the government, not private individuals.,Criticism of Command Econom,y,Command economies are,inefficient and reward unproductive workers,.,Command economies result in shadow/ illegal markets. Because the government controls the distribution of goods, rather than consumers and producers individuals begin to sell things illegally.,Command economies,cease to stay competitive,in the world because,competition and entrepreneurship is discouraged,.,The allocation of resources is inefficient,.,Democracy Averts Famine,No famine has ever taken place in the history of the world in a functioning democracy,.,This is because democratic governments,have to win elections and face public criticism, and have strong incentive to undertake measures to avert famines and other catastrophes.,(,Amartya,Sen,),Quick Review,The scarcity forces people to choose among many options, and these choices bring about opportunity cost. This is the basic economic problem.,It is the solution to this problem (what, how and for whom to produce) that differs among individuals, firms and governments.,This will determine the economic system adopted and the direction the economy will take when deciding how and for whom to allocate scarce resources within their society.,